updated 1/4/2008 6:24:19 PM ET 2008-01-04T23:24:19

Shares of Sallie Mae tumbled 13 percent on Friday, hitting a 52-week low, as investors reacted to the company’s disclosure that it would cut back on its core business of making student loans.

Sallie Mae, the nation’s largest student lender, has suffered in recent months from higher borrowing costs and the collapse of a $25 billion buyout. It has slashed its earnings forecast for the year and held a special sale of stock to raise $2.9 billion in cash.

Sallie Mae, formally known as SLM Corp., said in a regulatory filing Thursday that it planned to “be more selective” in making student loans, both those backed by the federal government and the higher-rate private loans. The Reston, Va.-based company reaped a bonanza in recent years from the boom in student lending, with some 10 million customers, and around $25 billion in private student loans and $128 billion in government-backed loans outstanding.

The company said in its filing with the Securities and Exchange Commission that it was retrenching in the business because of market conditions and the landmark student-loan law that took effect last October, cutting billions of dollars in federal subsidies for student lenders.

Meanwhile, defaults are rising on student loans, and credit-market tremors similar to those linked to the mortgage crisis have recently started to surface in the $85 billion student-loan market.

The travails have pummeled Sallie Mae shares. They sank Friday to $16.67, down $2.49, or 13 percent, after hitting a new annual low of $16.35 earlier in the day. That is a fraction of the $60-per-share buyout offer made last spring by the investor group led by private-equity firm J.C. Flowers & Co.

The company said in the regulatory filing that there might be a silver lining on the horizon.

“We expect to see many participants exit the student-loan industry in response to the (new law) as well as current market conditions,” the company said. As a result, it said, it expects to partly compensate for its reduced loan volumes “with increased market share taken from participants exiting the industry.”

Last month, Sallie Mae reduced its profit forecast for 2008 by more than 13 percent, blaming the constricting of credit markets that has driven up its costs for borrowing billions of dollars needed to fund its student loans. At the same time, the company said it failed to revive interest from the investor group that offered in April to buy it for $25 billion in the $60-a-share cash deal that has now wound up in court.

The flagging financial outlook for Sallie Mae, which lost $344 million in last year’s third quarter, could bolster the investor group’s legal argument that it should not have to pay a $900 million fee for walking away from the deal because of significant changes in economic or regulatory conditions affecting the company.

In a stormy conference call with analysts, Sallie Mae chief executive Albert L. Lord brushed aside several questions and ended the session with an expletive.

Then the company disclosed that federal education officials plan to examine whether its billing practices complied with federal law. Sallie Mae also noted a discrimination lawsuit filed against it recently in federal court in Connecticut by two women who alleged the company charged higher prices to students at schools with high black and Hispanic populations. It denied the allegation.

Sallie Mae’s sale last week of nearly 102 million shares of common stock, at $19.65 each, raised $2.9 billion — of which it said $2 billion would go to cover unprofitable contracts with its Wall Street bankers that require it to buy back shares at above-market prices.

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